The European Central Bank has lost a case against six of France’s largest banks after Europe’s top court ruled that the lenders should be exempt from holding capital against certain state-backed deposits.
The European Court of Justice said in a ruling published on Friday that the ECB should allow the lenders to exclude exposures related to French savings accounts from the leverage ratio, a regulatory tool introduced after the financial crisis to limit the size of a lender’s debt.
“The ECB has erred in law and committed manifest errors of assessment,” the ECJ said on Friday.
The Livret A, the main regulated deposit in France, is a financial product established in 1818 by Louis XVIII to pay back the debts incurred during the Napoleonic wars.
The Livret A has since become the savings scheme of choice for the people of France, because it is guaranteed by the government, offers a reasonable rate of interest, and attractive fiscal advantages. As of 2016, about €400bn is held in it and other regulated deposits.
The case pitted BNP Paribas, Société Générale, Crédit Agricole, Crédit Mutuel, BPCE and La Banque Postale against the central bank’s supervisory board, headed by Frenchwoman Danièle Nouy.
“This is the first instance of the ECB being overruled on a supervisory matter since it took over supervision of signficant banks in the eurozone,” said Amélie Champsaur, a partner at law firm Cleary Gottlieb representing BNP Paribas and Crédit Agricole.
Under EU rules, banks must have capital buffers worth at least 3 per cent of their total assets. But French banks argued that money from the Livret A, the special tax-free saving account which is deposited largely with the state-owned Caisse des Dépôts (CDC), should not be included in the calculation.
The banks contended that they were forced by law to deposit the bulk of the money collected under the schemes with the CDC, and therefore should not be penalised for their exposure. The CDC was also state-owned, and therefore secure, they said.
The ECB denied a request for special treatment in August 2016, leading the banks to file their case with the ECJ in December 2016. The supervisor’s argument was that an exemption could not be granted because, in the event of a liquidity shortage, the mechanism of transfer between the CDC and the banks in question was imperfect. The ECB argued that these flaws meant risks associated with excessive leverage could still arise.
The supervisor can either now appeal against the decision or come back to the banks with different reasoning for forcing them to include these savings deposits in the leverage ratio. The ECB declined to comment.
The judgment makes clear that it was the ECB’s reasoning that was at fault, not the principle of being able to ask the banks to include the savings deposits in the leverage ratio.
The ECJ said in its ruling on Friday that the ECB’s argument “must, by its general nature and having regard to the lack of detailed examination of the characteristics of regulation savings, be regarded as manifestly incorrect”.
“What we have in this decision is the principle that the ECB’s powers in supervision are limited not just by the treaty — as they are for monetary policy — but also by the intention of legislators,” said Ms Champsaur. “This opens the road to other challenges on supervisory matters generally.”
The case was especially important for BPCE and La Banque Postale, which previously had a monopoly on the products.
However, all of the major French lenders already have leverage ratios well above the 3 per cent regulatory minimum — ranging between 4.2 per cent at Crédit Agricole and 5.9 per cent at Crédit Mutuel.
The Livret A has long been a source of tension between French banks and regulators. Banks have argued that the rules governing the deposits lead to an inefficient use of capital and are a drain on liquidity in the banking sector.
About 65 per cent of the money is placed by the French banks with the CDC, which uses the funds to invest in public housing and other projects.
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